Interpreting and Enforcing the Voluntary FRAND Commitment

Tilburg Law & Economics Center (TILEC); University College London - Faculty of Laws

Date Written: July 20, 2010

Abstract

Technical standards are far from a new phenomenon. Since the late eighteenth and early twentieth centuries, national and international bodies - in many cases purely private and voluntary bodies - have been promulgating standards in a wide array of commercially important technical fields. Over the years, thousands of such standards have been developed, approved, and used in industry. Until recently, all this was very largely the domain of engineers; until the last decade, despite their commercial and international importance, technical standards attracted very little litigation or legal commentary.

But times have changed. Now, lawyers are studying intensively each stage of the standardization process: membership rules of standards-setting organizations ('SSOs'), policies concerning disclosure of potentially relevant patents, licensing of 'essential' patents, and enforcement in the case of alleged violations of SSO policies - all are now transformed into legal topics.

In this new world of standards, one of the currently most contentious issues concerns the meaning of a commitment by the holder of patents 'essential' to the practice of a standard to license such patents on 'fair, reasonable, and nondiscriminatory' (FRAND) terms and conditions. The body of legal literature addressing this question is by now substantial, and growing. While not necessarily reaching similar conclusions, a number of authors have addressed this issue as a question of economic theory: what limitations (if any) on the freedom of the parties negotiating a license to essential patents will best ensure efficient outcomes?

As a response to this question, authors have variously argued that, in order to satisfy a 'fair and reasonable' commitment, a patent holder: Must charge no more than the incremental value of his invention over the next best technical alternative; Must not negotiate for a royalty-free cross-license as part of the consideration for a license; Must set his royalty rate based on a mathematical proportion of all patents essential to the practice of a standard; Must set his royalty rate in such a way as to prevent cumulative royalties on the standardised product from exceeding a low percentage of the total sale price of that product; Must not raise requested royalty rates after the standard has been adopted, or after the relevant market has grown to maturity; Is not entitled to seek injunctive relief against a standard implementer should they fail to agree on license terms.

The types of economic arguments relied on by these authors to justify these restrictive regimes may well be useful in debating public policy and the proper application of antitrust rules - although one of the present authors and others have elsewhere critiqued the merits of many of these calls for what is essentially government intervention in the private licensing process. But in this paper we step back to ask a different question: What do these arguments and proposed regimes have to do with the contract which is the source of the FRAND obligation?

This paper is divided in four Parts. Part I reviews the basic fact that a FRAND commitment is the result of a voluntary contract between essential patent holders and a standards-setting organization, with the important corollary that the meaning of that commitment must be determined through the legal methods of contractual interpretation. Using a FRAND undertaking to ETSI as an example, it identifies the main categories of information potentially relevant to contract construction, including for instance the contract language itself, and the 'negotiation history' of the ETSI IPR Policy. Part II shows that none of these categories of information support any of the restrictive limitations listed at the opening of this introduction. On the contrary, ‘fair and reasonable’ are on their face flexible terms the specific content of which is substantially left to the negotiation between the parties. Our research also shows that all attempts made subsequent to the ETSI IPR Policy’s adoption to alter the balance of interests between essential patent holders and implementers by changing the meaning of FRAND have been rejected by the ETSI membership. Part III addresses issues regarding the judicial enforcement of a FRAND undertaking. First, we demonstrate that, when it is alleged that a patentee has failed to offer 'fair and reasonable' terms, the role of a court is not to determine what ‘fair and reasonable’ terms would be, but whether the terms offered, taking into account all of the specific circumstances between the parties and prevailing market conditions, fall outside the range of reasonableness contemplated by the FRAND commitment. Second, we conclude that a licencee should not be able to collaterally attack the enforceability of a licence based on a prior FRAND commitment. Third, we note that what is ‘fair and reasonable’ after full adjudication of infringement and validity may be higher than what would have been 'fair and reasonable' in the context of pre-litigation negotiations. Part IV offers a few observations as to the ‘intent of the parties’ with respect to the 'non-discriminatory' component of FRAND based on the deliberative record surrounding the adoption of the ETSI IPR policy, concluding that while the 'ND' of FRAND does impose requirements that in some contexts will go beyond the requirements of national competition law, it cannot be read as requiring the equivalent of universal 'most favored licensee' rights for all licensees.